The Turning Point for Venture Capital?

Following a rapid reversal of fortunes at the turn of the millennium, the venture capital industry has experienced largely lacklustre returns which have led to tough fundraising conditions for all but a select group of top-tier managers. However, more recently there have been some encouraging signs across the industry, with market conditions becoming more favourable, returns improving and fundraising picking up as investors take note. Is this the turning point for venture capital? Jessica Duong has examined the drivers of this success, and the impact of this on LP attitudes to the asset class.

According to Preqin report, “the pattern for venture capital returns shows clear underperformance relative to other strategies over 10 years, with an improving picture more recently past.” The internet, software, healthcare, telecoms and media industries are the sectors which have seen the highest level of investment in 2014 YTD. As expected, North America comprises the biggest proportion of global venture deal value by a significant margin; however, other markets such as Israel and India are also showing positive signs of growth.

Therefore, as venture capital performance improves and translates into higher returns for LPs, investor confidence in the venture capital industry has started to return. October 2014 saw the highest number of funds in market in the period 2007 – 2014 YTD, in addition to the fact that the proportion of venture capital funds failing to meet their targets is currently at a record low of 30%.

A recovery is well underway for the venture capital industry and investors are exhibiting signs of increased confidence, as reflected in the rising amounts of capital secured by venture capital funds, and deal and exit activity is growing. However, conditions are still tough, and venture capital fund managers seeking capital commitments need to continue to demonstrate to prospective investors that they have a strong strategy and deal pipeline, and a good alignment of interests.

Overall, the global venture capital landscape is currently seeing favourable conditions that are pointing to a healthy fundraising market and a strong deals environment. However, fund managers still face challenges in securing capital as investors are wary of the asset class, given the largely disappointing returns in the past 10 years, and will need to see more consistent performance over time. The recent uptick in venture capital performance confirms the market is at a real turning point. Should these trends continue, more investors will take notice and we could see a rejuvenated market.

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